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Why high oil prices threaten the recovery

High oil prices are threatening the global economic recovery.

So far, says BMO Nesbitt Burns, the risk to the United States is modest, though the International Energy Agency and others a potentially deeper world-wide hit.

BMO economist Sal Guatieri noted that oil prices rose 20 per cent last year, pushing gasoline in the U.S. above $3 a gallon for the first time in over two years. "According to our GDP model, the run-up in oil prices will reduce U.S. GDP by 0.3 per cent in 2011. Higher oil prices, along with softer house prices and higher bond yields, explain why the Fed hasn't meaningfully raised its growth outlook despite the tax-cut deal."

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An analysis by the IEA, according to The Financial Times, showed that oil import costs for the 34 countries of the OECD have surged by $200-billion (U.S.) over the past year, reaching $790-billion by the end of last year. That, the newspaper said, represents a loss of income of some 0.5 per cent of GDP in the largely wealthy nations that form the Organization for Economic Development and Co-Operation.

"Oil prices are entering a dangerous zone for the global economy," the IEA's chief economist, Faith Birol, told The Financial Times. "The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers.

This warning, the newspaper said, will ramp up pressure on OPEC countries to boost their production.

The strength in oil, chief economist David Rosenberg of Gluskin Sheff + Associates said today, does not reflect stronger consumer demand in the United States, but rather external forces and heightened investor demand.

"So consider the move in oil to be an exogenous negative shock for U.S. aggregate demand," Mr. Rosenberg said. "Oil price movements exert their peak impact with lags of 12 to 24 months so this is going to start to hit very soon. As it stands right now, the drag on U.S. domestic spending from the energy bit this year could well approach a full percentage point, much of it beyond the current quarter."

This article has been corrected from an earlier version.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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